Redwood Asset Management Inc. et al.
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of change of manager of a mutual fund, and a mutual fund merger -- merger approval required because merger does not meet the criteria for per-approval -- continuing fund has different investment objectives than terminating fund -- merger not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- manager of continuing fund is not an affiliate of the manager of the terminating funds -- securityholders provided with timely and adequate disclosure regarding the merger -- change of manager is not detrimental to unitholders or contrary to the public interest.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds ss. 5.5(1)(a), 5.5(1)(b), 5.5(3), 5.6, 5.7 and 19.1
March 28, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF REDWOOD ASSET MANAGEMENT INC. (Redwood) AND ASTON HILL ASSET MANAGEMENT INC. (Aston Hill) (together, the Filers) AND REDWOOD INCOME STRATEGIES CLASS (the Redwood Fund or the Terminating Fund) AND ASTON HILL GROWTH & INCOME FUND (the Continuing Fund and together with the Terminating Fund, the Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval of: (a) the proposed change of manager of the Redwood Fund from Redwood to Aston Hill (the Change of Manager) under section 5.5(1)(a) of National Instrument 81-102 Mutual Funds (NI 81-102); and (b) the proposed merger of the Terminating Fund into the Continuing Fund (the Merger and together with the Change of Manager the Proposed Transaction) under section 5.5(1)(b) of NI 81-102 (together the Approval Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada.
Interpretation
Terms defined in the Legislation, MI 11-102, National Instrument 14-101 -- Definitions, NI 81-102 and National Instrument 81-107 -- Independent Review Committee for Investment Funds (NI 81-107) have the same meanings if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filers:
Redwood and the Redwood Fund
1. Redwood is currently the manager of the Redwood Fund pursuant to a management agreement originally made as of January 10, 2008 (the Management Agreement).
2. Redwood is a corporation incorporated under the Business Corporations Act (Ontario) (OBCA) with its head office in Toronto, Ontario and is not in default of any requirements of applicable securities legislation.
3. Redwood is currently registered in Ontario under the applicable legislation as an exempt market dealer and portfolio manager. Redwood is currently registered in Quebec under the applicable legislation as an exempt market dealer. Redwood is also registered in Newfoundland and Labrador, Ontario and Quebec under the applicable legislation as an investment fund manager.
4. The Redwood Fund is a class of mutual fund shares of Ark Mutual Funds Ltd. (Ark Ltd.), a corporation formed under the Business Corporations Act (Ontario) (OBCA) by articles of incorporation dated November 2, 2007.
5. The Redwood Fund is a reporting issuer in all of the provinces of Canada and is not in default of any requirements of applicable securities legislation.
6. The securities of the Redwood Fund are currently offered under a simplified prospectus and annual information form each dated November 27, 2013, as amended by amendments to each dated February 13, 2014.
7. The Redwood Fund is subject to, among other laws and regulations, NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure and NI 81-107.
8. Aston Hill is the portfolio manager of the Redwood Fund.
9. The Redwood Fund's investment objective is to achieve long-term capital growth by investing in income oriented equities, income trusts and convertible and fixed-income securities trading predominantly on Canadian markets. The Redwood Fund may also focus its assets in specific industry sectors and asset classes based on analysis of business cycles, industry sectors and market outlook.
10. The Terminating Fund calculates its net asset value as at the close of trading on each day that the Toronto Stock Exchange is open for trading.
Aston Hill and the Continuing Fund
11. Aston Hill was formed under the laws of the Province of Ontario pursuant to articles of amalgamation dated December 30, 2011.
12. The head office of Aston Hill is located in Toronto, Ontario.
13. Aston Hill is currently registered in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Quebec under the applicable legislation as an exempt market dealer and portfolio manager. Aston Hill is also registered in Newfoundland and Labrador, Ontario and Quebec under the applicable legislation as an investment fund manager.
14. Aston Hill is not in default of securities legislation in any jurisdiction of Canada.
15. Aston Hill is the manager of the Aston Hill Mutual Funds, a family of mutual funds currently offered by way of a combined simplified prospectus and amended and restated simplified prospectus (the Aston Hill Prospectus) and a combined annual information form and amended and restated annual information form (the Aston Hill AIF), each dated May 30, 2013.
16. One of the Aston Hill Mutual Funds managed by Aston Hill, and that is offered pursuant to the Aston Hill Prospectus, the Aston Hill AIF, and a related fund facts (collectively, the Aston Hill Offering Documents) is the Continuing Fund.
17. The Continuing Fund, a mutual fund governed by a declaration of trust, initially was called "Lawrence Payout Ratio Trust" and was a non-redeemable investment fund, the units of which were traded on the Toronto Stock Exchange. Effective August 27, 2007, its declaration of trust was amended and restated to make certain changes, including those necessary to convert the Continuing Fund into an open-ended mutual fund and to change its name to "Lawrence Income and Growth Fund". On December 18, 2009, the Continuing Fund's declaration of trust was further amended to change its name to "Navina Income & Growth Fund", and on December 22, 2010 the declaration of trust was amended again to change the name of the Continuing Fund to its current name.
18. The Continuing Fund is a reporting issuer in all of the provinces and territories of Canada and is not in default of any requirements of applicable securities legislation.
19. The Continuing Fund currently distributes Series A, Series F and Series I units in all of the provinces and territories of Canada pursuant to the applicable Aston Hill Offering Documents. Series X units of the Continuing Fund also exist but are not available for purchase through the Aston Hill Offering Documents.
20. The Continuing Fund is also subject to, among other laws and regulations, NI 81-102, NI 81-106 and NI 81-107.
21. The Continuing Fund's investment objectives are to (i) pay unitholders monthly cash distributions, and (ii) preserve the net asset value per unit, by investing primarily in equity and debt securities of issuers located in Canada and around the world. The Continuing Fund may invest in Canadian income funds, convertible bonds, debentures, high yield debt instruments, listed equity securities, and cash or cash equivalents and may also invest in any other yield-based security or asset class that develops over time.
22. As with the Terminating Fund, the Continuing Fund calculates its net asset value as at the close of trading on each day that the Toronto Stock Exchange is open for trading.
Details of the Proposed Transaction
23. Redwood and Aston Hill entered into a purchase agreement on February 4, 2014 (the Purchase Agreement) pursuant to which Redwood has agreed to sell, assign and transfer all its right, title and interest in and to the Management Agreement to Aston Hill, as it pertains to the Redwood Fund. Under the terms of the Purchase Agreement, Aston Hill will pay Redwood a negotiated purchase price in consideration for such sale, assignment and transfer.
24. As a result, effective by or about April 15, 2014 (the Effective Date), and subject to receipt of all necessary regulatory and shareholder approvals and the satisfaction of all other required conditions precedent set out in the Purchase Agreement, including approval of the Merger, the Change of Manager will occur. As part of the Proposed Transaction, and also subject to receipt of all necessary approvals and completion of the Change of Manager, the Merger will occur after the close of business on the Effective Date.
25. A press release in connection with the Proposed Transaction was issued and disseminated on February 4, 2014. A related material change report was filed on February 5, 2014. Amendments to the simplified prospectus, annual information form and fund facts of the Redwood Fund were filed in connection with the Proposed Transaction on February 13, 2014 under SEDAR Project No. 02122406.
26. In accordance with the provisions of NI 81-107, Redwood referred the Proposed Transaction to the independent review committee of the Redwood Fund (the Redwood IRC) for its review. On February 3, 2014, the Redwood IRC advised Redwood that, after reasonable inquiry, the Proposed Transaction achieves a fair and reasonable result for the Redwood Fund. Aston Hill also referred the Merger to the independent review committee of the Continuing Fund (the Aston Hill IRC) for its review. On February 19, 2014, the Aston Hill IRC advised Aston Hill that, after reasonable inquiry, the Merger achieves a fair and reasonable result for the Continuing Fund.
27. Redwood will have no further responsibilities in respect of the Redwood Fund after the Effective Date. Redwood will continue to act as manager for certain other open-end funds that are not relevant to the Proposed Transaction.
28. Securityholders of the Redwood Fund will be asked to approve the Proposed Transaction at a special meeting to be held on March 28, 2014, as such special meeting may be postponed or adjourned (the Special Meeting). A notice of meeting and a management information circular (the Circular) was mailed to securityholders of the Redwood Fund on March 6, 2014 and filed on SEDAR in accordance with applicable securities legislation. The Circular contains: (a) sufficient information regarding the business, management and operations of Aston Hill, including details of the funds it manages and its officers and board of directors; (b) all information necessary to allow securityholders to make an informed decision about the Change of Manager and to vote on the Change of Manager; and (c) information required in connection with a fund merger as specified by section 5.6(1)(f) of NI 81-102. All other information and documents necessary to comply with the applicable proxy solicitation requirements of securities legislation for the Special Meeting have been mailed to securityholders of the Redwood Fund. The most recently filed fund facts of the Continuing Fund was also included with the Circular.
The Change of Manager
29. Redwood considers that the experience and integrity of each of the members of the Aston Hill current management team is apparent by their education and years of experience in the investment industry.
30. For the moment in time that the Redwood Fund will exist before the Merger occurs, Aston Hill will manage and administer the Redwood Fund in the same manner as Redwood. As noted above, Aston Hill is currently the portfolio manager of the Redwood Fund and will remain so.
31. The resignation of Redwood as manager of the Redwood Fund will be effective on the Effective Date. On that date, Aston Hill will assume the role of manager of the Redwood Fund under the Management Agreement.
Details of the Merger
32. The specific steps to implement the Merger are described below. The result of the Merger will be that investors in the Terminating Fund will cease to be shareholders in the Terminating Fund and will become unitholders in the Continuing Fund.
33. The proposed Merger will be structured as follows:
(a) the value of the Terminating Fund's portfolio and other assets will be determined at the close of business on the Effective Date;
(b) the Continuing Fund will acquire all or substantially all of the investment portfolio and the assets of the Terminating Fund in exchange for units of the Continuing Fund having an aggregate net asset value equal to the value of the investment portfolio and assets acquired;
(c) the Continuing Fund will not assume the Terminating Fund's liabilities and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger. Such liabilities will not include any amounts relating to the incentive fee payable by the Fund as Redwood intends to waive such fee payable for the current year;
(d) if necessary, the Terminating Fund will declare, pay and automatically reinvest a dividend of net capital gains and income (if any);
(e) the shares of the Terminating Fund will be redeemed at their net asset value and paid for with units of a corresponding series of the Continuing Fund (as described below) having an equal aggregate net asset value as of the Effective Date. Such units will be distributed to shareholders of the Terminating Fund on a pro rata basis in exchange for their shares in the Terminating Fund; and
(f) as soon as reasonably practicable after the Effective Date, the articles of Ark Ltd. will be amended in order to delete the class of shares of Ark Ltd. represented by the Terminating Fund, thereby winding up the Terminating Fund.
34. If the Merger is approved, Shareholders of the Terminating Fund will receive units of an equivalent class of the Continuing Fund, as shown opposite in the table below:
Terminating Fund
Continuing Fund
Series A shares
Series A units
Series AA shares
Series A units
Series F shares
Series F units
Series FF shares
Series F units
35. The Merger will not constitute a material change for the Continuing Fund, as the net asset value of the Continuing Fund is significantly larger than the net asset value of the Terminating Fund.
36. In the opinion of Aston Hill, the Merger will be beneficial to securityholders of the Funds for the following reasons:
(a) the management fees of the Continuing Fund are lower than those of the Terminating Fund;
(b) unlike the Terminating Fund, no Series of units of the Continuing Fund charges an incentive fee;
(c) due to their investment strategies, each Fund may receive regular income and foreign dividend payments. Due to the different tax rules that apply to mutual funds trusts (such as the Continuing Fund) and mutual fund corporations (such as the Terminating Fund), it is more tax efficient to operate in a mutual fund trust structure as ordinary income and foreign dividends may be flowed through a mutual fund trust;
(d) the Continuing Fund will have a greater level of assets which is expected to allow for: increased portfolio diversification opportunities; greater liquidity of investments; and increased economies of scale for operating expenses; and
(e) the Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund.
37. If all required approvals for the Proposed Transaction are obtained, it is intended that the Merger will occur after the close of business on the Effective Date. Aston Hill therefore anticipates that each shareholder of the Terminating Fund will become a unitholder of the Continuing Fund after the close of business on the Effective Date. The Terminating Fund will be wound-up as soon as reasonably possible following the Merger.
38. The cost of effecting the Merger (consisting primarily of proxy solicitation, printing, mailing, legal and regulatory fees) will be borne by Redwood and Aston Hill.
39. The right of the shareholders of the Terminating Fund to redeem or switch their shares of the Terminating Fund will cease as of the close of business on the day prior to the Effective Date. Shareholders of the Terminating Fund will subsequently be able to redeem, in the ordinary course and without the imposition of any fees or charges, the units of the Continuing Fund that they will acquire upon the Merger. Shareholders of the Terminating Fund with optional plans, including pre-authorized contribution plans, will have their plans automatically switched over to the Continuing Fund unless the Manager receives notice to the contrary. Redwood may suspend purchases of, or switches to, the Terminating Fund at any time prior to the Effective Date.
40. In the opinion of the Filers, the Merger satisfies all of the criteria for pre-approved reorganizations and transfers set forth in section 5.6(1) of NI 81-102 except that:
(a) the Merger will not be implemented as either a "qualifying exchange" within the meaning of section 132.2 of the Income Tax Act (Canada) (the Tax Act) or a tax-deferred transaction under section 85(1), 85.1(1), 86(1) or 87(1) of the Tax Act. The Merger will be implemented on a taxable basis as a corporate fund cannot be merged into a trust fund on a non-taxable basis. Consequently, the Merger will not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(b) of NI 81-102; and
(b) a reasonable person may not consider the investment objective of the Terminating Fund to be substantially similar to the investment objective of the Continuing Fund. Accordingly, such Merger may not meet the criteria for pre-approved reorganizations and transfers under subsection 5.6(1)(a)(ii) of NI 81-102.
41. The Circular provided:
(a) a summary of the anticipated tax implications to securityholders of the Terminating Fund and the Continuing Fund; and
(b) a comparison of the investment objectives, investment strategies and other material differences of the Funds.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Approval Sought is granted provided that Redwood obtains the prior approval of the securityholders of the Redwood Fund of the Proposed Transaction at the Special Meeting.